CBOT icy toward Merc bid

Shareholders make clear they prefer rival offer

March 23, 2007|By Susan Diesenhouse, Tribune staff reporter

If the leaders of the Chicago Mercantile Exchange thought their charts, tables and bullet points would persuade Chicago Board of Trade shareholders to ratify their long-planned merger even though a higher offer has appeared, that notion was obliterated Thursday.

After giving a carefully scripted presentation intended to "educate" CBOT stakeholders on why the Merc's $8.6 billion offer was better than the $9.9 billion bid by IntercontinentalExchange Inc., CBOT members delivered a clear message of their own.

"If there was a vote today, it would be a landslide for ICE," said Harlan Krumpfes, a Board of Trade member. "There's so much money on the table, there's no way people will sit back and accept less."

The Merc's proposed deal, once considered almost a foregone conclusion, has been on the table since last fall. Since then, the CBOT's own performance coupled with last week's surprise ICE offer has propelled the CBOT's share price to $193.29, up about 50 percent.

"The economics are not in line," said Jerry Mann, a CBOT shareholder. "Go back to the drawing board, come up with something more realistic, and we'll go with you."

Merc Chief Executive Craig Donohue told the crowd at the CBOT that "we're here to educate you about why the ICE proposal is inferior." But he found an unreceptive audience.

William Boris, who has been a grain trader at the CBOT since 1972, responded: "You missed the boat. This is just the beginning. If you want a deal to go through, make it fair market value and preserve our rights at the CBOE."

CBOT shareholders who owned a seat on the exchange before it went public in 2005 and kept all of their stock can request trading privileges at the Chicago Board Options Exchange, where a seat sold this month for $2.27 million. To them, it is critical that they retain that "exercise right."

"We need to be reassured that a merger will retain the value of that seat," said Bill Terman, a CBOT member and shareholder.

ICE has tried to offer such reassurances, as well as more money. "We feel like the tide has changed a bit," said ICE spokeswoman Kelly Loeffler. "Our bid is far superior."

Meanwhile, CBOT shareholders have company in their assumption that the Merc should pay more for their exchange.

The Merc offer values the Board of Trade at about $160 a share and the ICE offer at about $184 a share, while Morningstar estimates $193 a share as a fair market value.

"CME is trying very hard not to raise their bid," O'Shaughnessy said. "I suspect they want to hear from CBOT management first."

Richard Herr, senior vice president at Keefe, Bruyette & Woods, said the Merc could raise its offer to $220 a share and still make a profit.

In part, he said, the Merc offer was based on the CBOT's performance while it was fighting a price war with erstwhile rival Eurex US a few years ago. CBOT lowered trading fees to maintain market share.

Since CBOT leaders agreed to the Merc merger last fall, he said, "the Board of Trade has demonstrated higher fees and better expense control than expected."

In March 2006, Herr estimated CBOT annual earnings at $3.30 a share. Now he estimates them at $4.75 a share. "That's a huge difference," he said.

Meanwhile, rumblings that Wall Street firms oppose the Merc-CBOT merger for competitive reasons are true, Herr noted. "The market power CME-CBOT would have in interest-rate derivative trading is a great threat to large over-the-counter banks like Goldman Sachs and Morgan Stanley," he said.

Morgan Stanley is ICE's financial adviser in its CBOT bid. Goldman Sachs is a major shareholder.

Merc leaders appeared intransigent about increasing their bid.

But, explained Patrick Arbor, a longtime trader and former CBOT chairman, "They're very good poker players, but there's no way this merger happens unless they raise the price. It may be the right merger in terms of strategy, products, cost savings, but now it's all about money."